Can we defend our past economic performance in Pakistan?

ARTICLE (January 19 2009): Is the Musharraf government responsible for much of the ills that plague Pakistan both in the field of economics as well as security today? And if so why, given the advent of democracy in the country, in however nascent a form, are key decision-making members of that era not being held accountable?

These are critical questions plaguing the people of this country as we struggle with high inflationary pressures, massive unscheduled load shedding of gas and electricity and last, but not least, the rise in suicide attacks with its prohibitive economic cost both in terms of human and asset destruction and its impact on foreign and local investment levels.

Musharraf defended his government’s performance when he was allowed to come on state television to announce his resignation, a defence that left few convinced. He was strangely reticent about a well known fact, accepted by his numerous detractors that would have done much to absolve him of some of the blame: the unilateral decision he took to fully support the US led war on terror was not unconditional as is being alleged by his numerous detractors. But, instead, was conditional on unprecedented levels of foreign monetary support over the nine year period of his rule.

Much of this assistance was not subject to scrutiny. Take the case of the United States where half of the new money was provided through a post-9/11 Defense Department program known as Coalition Support Funds (CSF), that were not closely tracked by Congress. Pakistan’s flood of CSF money made it the third largest recipient of all U.S. military aid and assistance in the three years after 9/11; and we trailed only Israel and Egypt. Before 9/11, Pakistan received less military aid and assistance from the U.S. than Estonia or Panama, largely because of punitive U.S. sanctions imposed as punishment for Pakistan’s covert pursuit of a nuclear weapons program that culminated in the test in 1998 as well as the democracy deficit as a consequence of Musharraf’s military coup. But unfortunately these massive amounts were not available for development purposes.

The US perceptions began to change by 2006. Senator Jack Reed, Democrat from Rhode Island, after his return from Pakistan in October 2006, noted in a report to fellow lawmakers that officials at the American embassy in Pakistan recommended changing the program “to paying for specific objectives that are planned and executed, rather than simply paying what the country bills.” The trust hitherto extended to Pakistan under Musharraf had begun to erode.

Be that as it may post 9/11 Pakistan also witnessed a significant increase in the financial inflow for non-military sectors in comparison to previous years. This accounted for unprecedented growth levels in the country and, so allege critics, not to any major economic policy that was devised by Musharraf’s factotum, commercial banker Shaukat Aziz, or, in turn, Aziz’s gofer, Salman Shah.

As proof of their contention these critics allege that the former government ignored investing in the physical infrastructure of this country, notably energy that is the root cause of current public discontent as well as a significant decline in the country’s manufacturing productivity. In this context Salman Shah’s statement in a recently released article, reportedly much used by Shaukat Aziz in defence of his government’s economic performance, that “while we should be on the right side of the world in the war on terror, the world should seriously help us in our endeavour to build a better economic future for our people” is inexplicable.

While supporting President Zardari’s hectic foreign tours prior to going on the IMF programme with the stipulated objective of getting money from anywhere but the IMF, Shah writes that what Pakistan needs is a ‘positive brand image’ – spoken like an advertising man rather than a de facto finance minister of the former regime. He also maintains that during the former regime Pakistan had a strong brand image.

As proof positive he writes “investors favourably compared Pakistan to India, China and Vietnam. Every time we did a road show we were highly successful in our endeavours whether it was the OGDC flotation of UBL, GDR and Euro bonds or large privatizations, investors flocked to our offerings.” He conveniently ignores three facts. One that the privatisation he boasts of was suspect in a number of cases and few, including the superior judiciary, believed that everything was above board. It is also relevant to note that with increasing US trust deficit in our commitment to the war on terror more money was generated through privatisation. Second there was no global recession then as at present which militates against privatising at present.

And finally he must also be aware of another disquieting fact: that portfolio investment is quick to make short term profit though it no way implies that one has sold a brand image successfully; and these speculators are just as quick to exit the country. This was the main grouse of South East Asian countries against speculators who they held responsible for the Asian financial crisis that left thousands homeless and destitute in its wake.

What is also disquieting is that Shah ignores the fact that the international financial institutions were supporting reforms in Vietnam, thereby increasing the share of concessional funding to the country – lending linked to performance – while Pakistan’s share of concessional funding declined. He also ignores the fact that India has reached a level of development, unlike Pakistan, where it is no longer eligible for concessional funding from the IFIs.

The Musharraf era thus was marked by India and Pakistan no longer being comparable at any level and this was epitomised by George Bush’s reference to different historic realities of the two countries when he refused to extend a nuclear deal similar to what he had offered the Indians. It is extremely unfortunate that our bureaucrats turned politicians refuse to admit mistakes and thereby learn lessons from the past.

Shah’s ten point programme released after he left office is symptomatic of our past economic pundits: giving advice to their successors which they themselves did not follow.

These include (i) jump starting Kalabagh Dam, and if a dictator could not jump start it because of a lack of political consensus one wonders how he thinks a democratically elected government with no overall majority in the centre will succeed; he also proposes building dams to access cheap hydel electricity but fails to identify source of funding; (ii) the IMF prescription of tight fiscal policy and lower deficit even though Shah must be held accountable for large subsidies to the oil sector leading to the huge deficit; (iii) deregulate agricultural prices based on his assessment that agriculture commodity prices have moved in favour of farmers but, if followed, this would lead to higher inflationary pressure to be borne by the poor; (iv) he adds we should stop cribbing about the consumer economy thereby showing ignorance of basic economic theory namely that high domestic savings fuelling domestic investment are preferable to borrowing from abroad to invest as was evident during the Musharraf era; (v) he insists FBR must generate more revenue and he like his successors did not have the courage to take on the sacred cows; (vi) we must privatise to create a vibrant economy and continue to grow at 7 to 8 percent – amazing words given the global recession; (vii) development projects must be completed but with a depleted treasury that Shah must be held accountable for development expenditure had to be curtailed; (viii) deregulation and privatisation must continue, bold words that are not being followed by even the capitalist giants of our world due to recession; (ix) social safety nets must be made foolproof to protect the poor – also an IMF prescription; and (x) our bankers are second to none he maintains and urges that we must further increase the reach and competitiveness of the financial sector with microfinance playing a major role – a prescription much supported by development institutions.

Be that as it may Shah argued correctly in the article that inflation would begin to come down and that the oil bill will decline lessening pressure on our balance of payment position. In Shah’s defence one has to stipulate that the article is dated and hence some of its conclusions not based on the current global and domestic economic scenario. Secondly he may also argue that there were several decisions he was forced to undertake by Musharraf.

That maybe true but the fact remains that he always had the option of resigning if he did not support coercive policy measures including heavy subsidisation of oil and products. His failure to do so reflects the fact that he gave greater weight to sustaining his own position than to the country.

Half a year down the line and almost a year since the time Musharraf had a vise like grip on all economic activity the government is continuing to struggle against the ills that plague the country. The question people are now beginning to ask is whether one must continue to blame these ills on the Musharraf era or can we reasonably hold the new government responsible? Prime Minister Gilani’s statement delivered on the floor of the House categorically stated that he and his government must take full responsibility for what is happening in the country today.

With Asif Zardari’s popularity rating at as low as 19 percent, lower than that of George Bush, the answer is that Pakistanis have begun to hold him personally responsible for the ills that beset us. Perhaps the factor most responsible for President Zardari’s rating is that at least 40 percent of the energy crisis is attributed to a doubling of the inter-corporate debt during the current dispensation. Add this to the perception that nepotism and cronyism continues and one has the ingredients of disillusionment. It is time for a change from the past that must be made manifest through statements as well as not protecting the past managers.